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Saturday, January 7, 2017

The fag end of the financial year is
when we scurry around and grapple with bewildering alphanumeric combinations
like Section 80C and 80DD. If your tax-saving efforts are last minute the
chances of locking funds in an unsuitable investment are quite high.

Tax-saving investment should never be made on an ad-hoc basis or for an
ill-conceived goal. But with the accounts department of your organisation
knocking on your door to submit proofs of actual investments, many people try
to make tax saving investments at the last minute.

Here is how you can do last-minute tax planning to not only reduce your tax
liability, but also save towards the goals you have set at different life
stages.

While choosing the right tax-saver, base your decision on these five important
things, among others:
*How much deduction from gross total income can you avail
*The amount of fresh tax-saving investments you need to make
*Kind of tax-saving instrument you should invest in
*Tenure of the investment
*Taxability of income from the investment

Once you have got a fix on these, equally important is to choose a tax-saving
instrument which can be linked to a specific goal .

How much deduction can you avail
Section 80C allows deduction from gross total income (before arriving at
taxable income) of up to Rs 1.5 lakh per annum on one or more eligible
investments and specified expenses. The eligible investments include life
insurance, Equity Linked Savings Schemes (ELSS) mutual funds, Public Provident
Fund (PPF), National Savings Certificate (NSC), etc., while expenses and outflows
can include tuition fees, principal repayment of home loan, among others.

If you have exhausted your annual
limit Sec 80C limit of Rs 1.5 lakh, you can also look at National Pension
System (NPS) to save towards retirement and, in the process, save additional
tax.

From 2015-16 onwards, an additional (additional to Section 80C) deduction of up
to Rs 50,000 under Section 80CCD (1b) for investment in NPS is also possible.
For someone in the highest 30 per cent income tax bracket, it's an additional
annual saving of about Rs 15,000.

Further, the premium paid towards a health insurance plan for self and
family members qualifies for tax benefit under Section 80D for Rs 25,000 and Rs
30,000 for those above 60. If one has a home loan, interest payments made
towards its repayment can also be claimed under Section 24 of the Income Tax
Act. The other deductions include donations under Section 80G, interest
payments under Section 80E for education loan, etc.

Fresh investments you need to make
Before you start looking for the right tax saver, run this simple exercise to
evaluate whether you actually need to make any fresh investments for this
financial year (2016-17).

The exercise above gives you a total of existing commitments under Section 80C,
80D and other deductions. Now, from your gross total income, reduce the
amount to arrive at the taxable income.

If your net income after doing the above calculation is still above the tax
exemption limit of Rs 2.5 lakh then you need to look at further tax saving. To
reduce taxable income further and provided the limit of section 80C isn't yet
exhausted, look for the right Section 80C investments.

Kind of tax-saving instrument
Within the basket of Section 80C investments, there are two options to choose
from: Investments offering "Fixed and assured returns" and those
offering "market-linked returns".

The former primarily includes debt assets, including notified bank deposits
with a minimum period of five years, endowment life insurance plans, PPF, NSC,
Senior Citizens Savings Scheme (SCSC), etc. The returns are fixed for the
entire duration and and generally in line with the rates prevalent in the
economy and very close to inflation figure. They suit conservative investors
whose aim is to preserve capital rather than create wealth.

The 'market-linked returns' category is primarily the equity-asset class. Here,
one can choose from ELSS of mutual funds and Unit-Linked Insurance Plan (ULIP),
pension plans and the NPS. The returns are not assured but linked to the
performance of the underlying assets such as equity or debt. They have
the potential to generate higher inflation adjusted return in the long run to
the extent they are based on the equity asset class. Tenure
All the above tax-saving instruments, by nature, are medium to long term
products: From a three-year lock-in that comes with ELSS to a 15-year lock-in
of PPF. Some like life insurance require annual payments to be made for a
longer duration.

Taxability of income
Another important factor to consider is the post-tax return of the tax-saving
investment. For instance, most fixed and assured returns products such as NSC provide
you with Section 80C benefits, but the returns, currently 8 per cent
(five-year) annually, are taxable. This makes the effective post-tax return
equal to 5.52 per cent for the highest taxpayers. Considering the annual
inflation of six per cent, the real return is almost zero!

Of all the tax-saving tools, only PPF, EPF, ELSS and insurance plans enjoy the
EEE status, i.e., the growth is tax-exempt during the three stages of
investing, growth and withdrawal.

Making the right choice
First, identify your medium and long term goals. A market-linked equity-backed
tax-saving instrument is good for long term goals as equities need time to
perform. And, before considering a taxable investment, see the tax rate that
applies to you and consider the post-tax return. A low post-tax return after
adjusting for inflation will not help you in achieving your goals in the long
run. Inflation erodes the purchasing power of money, especially over long term.

Conclusion
Tax planning should ideally begin at the start of every financial year.
Remember, the risks of planning tax-saving in a hurry later are manifold. There
is, for instance, a high probability of picking up an unsuitable product. Also,
there isn't any one instrument that can help you save tax and at the same time
also provide safe, assured and highest return. Your final choice should ideally
be based on a gamut of factors rather than solely being driven by returns from
the financial product.

The
fag end of the financial year is when we scurry around and grapple with
bewildering alphanumeric combinations like Section 80C and 80DD. If
your tax-saving efforts are last minute the chances of locking funds in
an unsuitable investment are quite high.

Tax-saving investment should never be made on an ad-hoc basis or for
an ill-conceived goal. But with the accounts department of your
organisation knocking on your door to submit proofs of actual
investments, many people try to ..

The
fag end of the financial year is when we scurry around and grapple with
bewildering alphanumeric combinations like Section 80C and 80DD. If
your tax-saving efforts are last minute the chances of locking funds in
an unsuitable investment are quite high.

Tax-saving investment should never be made on an ad-hoc basis or for
an ill-conceived goal. But with the accounts department of your
organisation knocking on your door to submit proofs of actual
investments, many people try to ..

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